Our pensions don’t need any more tinkering

TWICE a year, every year, you can guarantee that pensions – our pensions – suddenly become a political hot potato. First in the run-up to the Chancellor’s Budget in March and then in the weeks leading up to the Autumn Statement.

Frustrating? Yes, but a fact of political life, now and forever more unless some radical (and brave) government in the future stops bolstering the contributions we make into pensions with tax relief.

This year is no exception. Rumours were rife earlier in the year that George Osborne was plotting a radical overhaul of pensions – one which would see tax relief on contributions pared back to the bone.

It never quite materialised although the lifetime savings allowance – the maximum amount that can be held inside a pension fund without further tax charges being applied – was (ludicrously and unfairly) scaled back from £1.25million to £1million.

Additional rate taxpayers also saw their ability to fund a pension compromised by a reduction in the annual amount they (and their employers) are permitted to contribute. Again, a bewildering and spiteful move.

We also saw the announcement of the multi-purpose Lifetime Individual Savings Account aimed at encouraging the young to save for a first-time home – and for a far-off retirement.

With a little luck, LISA will hit the streets next April although some companies such as Nationwide Building Society have already said they will not touch it with a bargepole because of the onerous exit penalties that will be applied on early withdrawals.

With the Autumn Statement just over a month away (November 23), the rumours have already started about what the new kid at Number 11 – Philip Hammond – has up his pension sleeve.

Over the past few days, we have learnt that a document has been circulating among Government Ministers arguing for a radical overhaul of pension tax breaks.

Out would go the present system that gives the biggest tax breaks to higher and additional rate taxpayers who currently enjoy 40 and 45 per cent tax relief on contributions. In would come a regime where the tax boost would be age dependent with the youngest benefiting the most.

Referred to as the ‘100 minus age’ system, savers would get a Government boost of £100 minus their age for every £100 they contributed. For example, a 25-year-old would receive a top-up of £75 for every £100 invested while a 55-year-old would get £45. Annual pension contributions would be capped at £20,000 – half those currently permitted – so as to keep a tight lid on the cost of the new regime.

This idea is not without its fans. Tom McPhail, head of retirement policy at Hargreaves Lansdown, believes it would help to ‘engage younger workers with retirement savings’. But I think it is barmy – on so many levels.

For a start, auto-enrolment – the railroading of workers into pensions – is already forcing youngsters to ‘engage’ with longterm savings. Understandably, most are saving the bare minimum because they have other pressures on their finances (debt).

A tax relief framework skewed towards the young will not relieve this pressure – and will not persuade them to save any more.

It’s also hardly good politics for the Government to reward all of us on our birthday with a reduction in the amount it is prepared to bolster our pensions with. Ageist or what?

From an administrative point of view, I imagine such a regime would be a nightmare to introduce – turning the hair of pension administrators Gandalf white.

We don’t need more pensions tinkering and greater complexity like this. Only last week, the Office for Budget Responsibility said Osborne’s relentless assault on pensions had made them ‘less attractive and non-pension savings more attractive’.

Surely, a prudent Government wants to encourage us to save long-term so that we do not become a burden on the State in our dotage.

Rather than this hare-brained idea dreamt up by some Treasury flunkey masquerading as the Mad Hatter, I would urge Philip Hammond to unwind some of the bad pensions policy implemented by his predecessor.

For a start, he should abolish the lifetime savings allowance, thereby spurring people into saving as much as possible for their retirement. He should then reverse the decision to reduce the cap on annual contributions for additional rate taxpayers. It should be £40,000 irrespective of whether a saver is a basic, higher or additional rate taxpayer. Finally, he should tell us he will leave our pensions alone for the remainder of this Parliament. A pension guarantee we would all welcome.

Tax relief skewed towards the young will turn the hair of administrators Gandalf white...